Winter starts to bite

Concerns over a supply shortfall are rising as much of Europe experiences a cold snap. Gas storage units are full, Russian gas is still flowing and industrial demand is almost down by a quarter, but what is the outlook for the coming months and the coming winter? Listen to a discussion on the key supply and demand fundamentals, and the impact of easing Covid lockdowns in China on LNG flows. Could wholesale gas prices return to EUR 300/MWh seen last August?

Host: Richard Sverrisson, Editor-in-Chief, Montel

Guests: Nadia Martin Wiggen, Energy Analyst, Pareto and Eleni Papadopoulou, Lead Gas LNG Insights Research, Kpler

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:06

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. This week we return again to developments in the gas market. The weather's starting to get cold, and Europe is already withdrawing from storage facilities. Can we expect an end to Russian gas deliveries, both LNG and pipes? And what's the outlook for prices? Could we get anywhere close to 300 euros a megawatt hour? Helping me, Richard Sverrisson to discuss these issues and much, much more are Eleni Papadopoulou of Kepler and Nadia Martin Wiggen of Pareto. A warm welcome to you both. I'd like to start by looking at the market prices where we are now. We're almost, we're below half what we were at the peak earlier this year. Nadia what's going on at the moment? What's driving prices primarily?

Nadia Martin Wiggen, Energy Analyst, Pareto: 1:02

The current change, we're down from the highs, but we're up from the lows. The highs were, because we were of course in the summer, rushing to build storage to prepare for winter. And this was. An abnormal trading opportunity. And then when everyone is suddenly buying and you have new buyers in the market, prices go up at the same time when we are having a shortage in storage of power, for, from hydro and nuclear facilities were down. So that's why. Since the shoulder period, which would really be considered second half of September, October, the start of November, those were uncharacteristically warm weeks for Europe in particular. So as a result, we didn't start drawing down any of our European storages that we built up over 90% during that period. We only started drying it down a little bit in November and. To be frank, in Oslo it's only starting to get cold in the last couple of days, so that is why, we haven't seen really that demand. That we've seen characteristically in other years because it's a late start to the winter.

Richard Sverrisson, Editor-in-Chief, Montel: 2:19

What's your view here, Eleni? Would, do you expect us to see with, to maintain this sort of 130 to 150 euro per megawatt range in the coming weeks into the new year?

Eleni Papadopoulou, Lead Gas LNG Insights Research, Kepler: 2:30

I think it's a combination of factors that we need to bear in mind. Whether is playing a big role as of. Lately and more so as we move further out into the winter season. So even on a daily basis for example, on 28th of November with less wind, the UK had to burn more gas and utilize more of its electricity imports from other countries. National Grid at some point flag. Its electricity saving, demand flexibility service for the next day, but it canceled it on the same day. And that was reflected in the prices which were higher initially and then is out later on. So the market is still very nervous early in the winter, despite the fact that we have high inventories. And we can see that also reflected in the market prices, even from announcements that are probable and not definite. For example gastro threatening to reduce supplies via Ukraine on 22nd of November. We saw that reflecting the prices, but it didn't actually.

Richard Sverrisson, Editor-in-Chief, Montel: 3:40

Later. Absolutely. Eleni. If I can turn to you, Nadia, and say, you mentioned it's early December, it's only just starting to get cold in Northern Europe. Ha has the market been a bit complacent? Thinking that, given that the mild weather and that thinking, winter's, it's quite far away. Let's let's keep burning gas.

Nadia Martin Wiggen, Energy Analyst, Pareto: 3:58

I don't think so. We've seen a significant amount of demand destruction across industry, since the summer. At first it was around 10%, then it was 20%. Our general call to get through the winter was that we would need a 10% destruction in demand, and we see that. So I would say that side of the market is absolutely not complacent, and we don't really see that jumping higher. Right now, I think there is almost a situation though where, if you take the perspective of a trader or someone who is a storage owner that really paid up for natural gas in the summer, has it's sitting in storage, you're almost incentivized. To bring in new LNG cargoes. I'm sure Lenny can comment on this more. And not close off the losing trade at levels as they are right now. And because we haven't really started drawing down on the storage, it's not an issue. And of course when we look at the competition for that LNG, we haven't had the cold weather in Asia that has spurred on buying. We haven't had. A comeback in China, China is going the other way. The fourth quarter is a more severe lockdown than we expected, and we see the ramifications across natural gas demand and oil demand, both on parent demand and real demand. So I, I don't think that the market is complacent at all. I think the market is actually adequately prepared and has never been in such a high storage situation in Europe. Before X COVID and therefore is trying to make sense of what to do next. And of course it can change very quickly. And then we start to have these steep drawdowns. So I think it's more of waiting to see. How quickly things change and then we'll see the reactions.

Richard Sverrisson, Editor-in-Chief, Montel: 5:49

Eleni what do you think here? What's on the supply side last week's podcast talked about a 30 BCM shortfall for the coming winter. Is this something that you also see or think?

Eleni Papadopoulou, Lead Gas LNG Insights Research, Kepler: 6:00

In my view, the market has not been overconfident. And as Nadia mentioned, there were some good preventative measures taken. For example, in terms of storage the European Commission mandated the target of 80% full storage for every European member state by November, and it actually reached that target earlier on ahead of schedule and mind. The weather as well helped Europe delay the gas withdrawal se season to meet November. Now some. In terms of LNG import capacity, yes, it's being tested but also there are initiatives to add infrastructure and expand existing ones. For example recently Spain and France posted capacity of I gas pipeline by 66%, and there was a joint project pipeline between Danish energy net and Polish gas transmission system operator. Which added the Baltic pipe. The Baltic pipe, exactly. And so that's also adding another layer of energy security to Europe. US LNG has played a key role in the European supply mix, but we also need to bear in mind that Russia and G has continued to flow, and so an annual increase in November. There are limitations on how much more gas pipeline suppliers are able to ship to Europe and agreed with Nadia. That demand distraction has been a critical element into helping bridge the gap as well. And we might see that energy saving measures will play even be bigger role coming winter. So far we have been managing well and expecting to continue do just to summarize, we have the cushion from the storage gas, but also if prices should help then further out demand destruction will come into play.

Richard Sverrisson, Editor-in-Chief, Montel: 7:51

What do you think Nadia were you,

Nadia Martin Wiggen, Energy Analyst, Pareto: 7:53

I just wanted to add on to when also was bringing up the part about the demand destruction we've seen, so I commented really only on the industrial side, but I think when we think about the personal side now, that could be much stickier. In terms of people's habits changing. And so I think that is a very interesting element for us to consider on how much demand will Europe need in the future if everyone becomes more used to having cooler temperatures in their house and is just thinking about that consumption going forward. So I, I think we have this first real test. In the market. And then the other thing I wanted to add is that, we overshot the goal of 90% storage levels. We were almost at 98% at the high. And so that is when we also think about how we were all modeling, how much, demand, destruction we had to have because we overachieved on that first level, it's also given us a leg up. And I think that's something very important for us to remember for next year, that if we are only at 90% next year. And we have the same winter. It's not going to be as loose. And if we have a faster start to the winter, then it will be tighter, and that is before we start thinking about the extra supply issues and things like that going forward. So we really over-prepared and overshot our expectations.

Richard Sverrisson, Editor-in-Chief, Montel: 9:22

Which is a good and a bad thing in a way then Nadia

Nadia Martin Wiggen, Energy Analyst, Pareto: 9:24

It's especially bad for those who built up the storage

Richard Sverrisson, Editor-in-Chief, Montel: 9:28

Absolutely.

Nadia Martin Wiggen, Energy Analyst, Pareto: 9:28

In crisis. So it's and even things that we've seen, like for example, Ecuador, right? When they stop injecting gas into some of their oil fields in order to maximize. The amount of gas that they could send to Europe, that raised their output five to 8%. And that is a temporary measure with prices as they are now, they're not incentivized to do that as much, but it's not something that they would switch after eight weeks of changing of a change in that price. It's a longer term decision. And so that is something that they will have to think about for next year and see what our situation is.

Richard Sverrisson, Editor-in-Chief, Montel: 10:03

That's interesting. And I'd to ask you Eleni about, you mentioned about Russian, LNG, the still flowing into Europe, is that's still happening as we speak, is it?

Eleni Papadopoulou, Lead Gas LNG Insights Research, Kepler: 10:11

Yes. It's,

Richard Sverrisson, Editor-in-Chief, Montel: 10:12

This is quite, could you explain how that can happen when all the, is that sanctioned breaking or, how has that been happening?

Eleni Papadopoulou, Lead Gas LNG Insights Research, Kepler: 10:18

So we've been seeing an increase. Actually in terms of Russian LNG exports on the rise even to Europe, and this comes despite the major plan that Yama, LG working at the hundred and 10% utilization rate. Russia tries to export as many cargos of LNG as possible. And since there is the wake of the cutting pipeline supplies to Europe.

Nadia Martin Wiggen, Energy Analyst, Pareto: 10:44

But it is very interesting from a political perspective because of course, China sorry, Russia is choosing not to send that gas through the pipelines, right? And instead they are increasing exports in LNG. But I think that this is especially indicating kind of their view in the medium term that they're realizing that Europe isn't going to be their number one buyer anymore. So they need to develop that export capacity as much as possible. Utilize it, okay. Sell it to Europe at a price now, but then plan to sell it elsewhere. But of course, China's not buying now, so they're not gonna buy Europe. European loaded l and g take it all the way to China.

Richard Sverrisson, Editor-in-Chief, Montel: 11:25

Absolutely. Is this what your view as well, Eleni? How can we expect these LNG shipments from Yamal to continue

Eleni Papadopoulou, Lead Gas LNG Insights Research, Kepler: 11:32

in terms of the forecast? Unless, until we hear more in terms of any announcements. Aside from what's happening on the. It's business as usual. So for example, for North Stream, there might be actually delay to April, 2023. But everything else in Russia's side, we expect business as usual. And obviously there are upside risk if anything else happens. They're longer term targets in to actually be in free of Russian gas from your perspective. But yeah, in terms of talking about this winter ahead, this business as usual,

Richard Sverrisson, Editor-in-Chief, Montel: 12:12

that, that's very interesting. If we talk about pipeline flows from Russia Nadia, have you been surprised that they're still flowing and they've even increased a touch?

Nadia Martin Wiggen, Energy Analyst, Pareto: 12:21

It's quite minimal. Of course when I speak to gas traders about this, I think once we hit the 35 ncm a day mark 28, that's basically zero. And then they say if it drops to zero, nothing will happen. And of course the price still jumps when it. Goes to zero. But I think it's very much priced into people's heads that it's not flowing. Ecuador is actually sending gas all the way to Ukraine, for example. That is not something that I would've expected at all when this war broke out. So I think we still see very minimum flows. And the market assumption is that. That might as well be zero. And next year it basically will be.

Richard Sverrisson, Editor-in-Chief, Montel: 13:02

When next year do you expect 'em to hit zero?

Nadia Martin Wiggen, Energy Analyst, Pareto: 13:05

Interesting question. It's almost funny that they haven't really sent it to zero, may it's so I don't know, probably maybe ahead of the winter, historically, the games between Russia and central and Western Europe have taken place in the summer. So maybe already in the summer that will happen. That's the big buying up period. Make us pay more, for example. So I think that could already happen there. And that is where, when we think about the l and g market, we think in terms of a year on year number, when we think of winters, we think in terms of winters, right? But from a shipping perspective, you know when we think about our expectations for next year, we assume that it is zero and it's where we expect this year's LNG imports into Europe, we'll have jumped 11% year on year. We expect a further 54% jump next year, and that is a massive difference. At least that's the call for the LNG and it won't actually all make it in, but that is how much we think this market will actually need more. L.

Richard Sverrisson, Editor-in-Chief, Montel: 14:15

What's your view, Eleni? What do you think about the Russian flows and if they could seize completely? Is this something that you've modeled in as well into your analysis?

Eleni Papadopoulou, Lead Gas LNG Insights Research, Kepler: 14:23

We've previously even done a webinar on it. It, if we've covered it as part of the webinar and in order to actually look into substantially Russian flow there has to be. Multiple factor in place. So we have to have a combination of LNG, additional pipeline supply and demand distraction will see storage draw down to balance the European gas market and so on. But there is a question in terms of daily volatility and whether that would actually create any shortages in terms of, and when I say shortages, just maybe demand destruction. On specific days, and as I've mentioned before that will also be weather driven on some specific days. And sometimes we also have the element of surprise when, for example, like in August this year when prices reached over 300 euro per megawatt hour, we saw multiple factors playing out to get this acute situation, like low imports to Europe, announcement of nursery maintenance, Norwegian outages and so on. But for this kind of black swan events to happen at the same time, that's something that we try to look into by running scenarios.

Richard Sverrisson, Editor-in-Chief, Montel: 15:48

Absolutely. But what are your expectations in terms of LNG imports Eleni we've seen record numbers coming to Europe in November. Do you expect this trend to continue?

Eleni Papadopoulou, Lead Gas LNG Insights Research, Kepler: 15:58

We do expect additional LNG imports into Europe especially in light of winter demand, but also some stocks will be drawn down. We expecting a bit more overlapping supply, or let call it LNG availability rather than supply into Europe. Just because of the way expectations are for Asian demand, for example. While we are seeing increased imports, LNG imports into parts of Northeast Asia, we are also seeing quite well stocked storage sites, and I'm talking about LNG inventories, for example, in Japan or South Korea. There is a question mark in terms of how gas demand will perform in China, especially in light of COVID related lockdowns slowing economy, high gas prices, and so on. Our expectation is that it'll prop up demand, but it'll be limited.

Richard Sverrisson, Editor-in-Chief, Montel: 16:57

Okay. What do you think here, Nadia? What you mentioned like eleni the lockdowns in China the, the demand is much lower than it would otherwise be. What are your expectations for the s in terms of demand? Will, will it, will these LNG shipments still flow to Europe or will they, maybe further outcome, as things ease in China flow more to be shipped more to China?

Nadia Martin Wiggen, Energy Analyst, Pareto: 17:19

First, just to start with our outlook for 2022. The, I a had been forecasting 3% growth in real na natural gas demand for this year, and our expectation is that will be very much a disappointment. It'll be flat to negative. We have negative oil demand in China this year for the first time since 2006, not even in the great financial crisis that we have. Negative oil demand. I think the story looks very similar on the gas side. And however we expect that come the first quarter. China will start buying LNG. China will stop, will start buying oil. And this is because we expect lockdowns to start coming off in the second quarter. But when you're the world's largest importer of oil. And such an important player as well. On the gas side, you're not going to announce we're out of zero COVID and then start buying. You need to start buying ahead of side, and so this is where we expect to start seeing those shipments really flying over there, and that'll be the first signal that China will ease out. Ease in our view. So I think in the first quarter, the ease we've had in securing cargoes and prices here, I. And this is actually an interesting point when Elany was talking about storage, right? And if we compare the regions and countries of the world in storage capacity, right? There's been a big gripe in Europe that, oh, our storage capacity is insufficient relative to our demand because it doesn't even cover 50% of what we need in winter, right? Guess what? We have the largest storage capacity relative to our demand needs outta any other region. The next best is Japan. Then we have the us, which is of course the huge net exporter producer. So it doesn't really matter relatively speaking, if they have. That relative storage capacity. Then you have South Korea and then you have China. So China's actually the lowest, and according to our estimates, we think that's less than 10% coverage of their actual demand. So when we look on the rest of the Asian demand year to date, it's also been, quite. Disappointing. We've had flat demand in terms of our expectations in India for natural gas. Versus a big jump Last year as they came out of COVID, we had negative demand growth expectations in Japan. Part of that is because they're bringing their nuclear facilities back line. And when we look at emerging Asia, that's flat and emerging. Asia particularly looks disastrous because, Germany and Europe are taking their FSRs. And so they can't even use them to actually bring in LNG, it's so I think that China's going to be the big driver in that, but other countries as well can really start hitting the gas on that. And I think that as we see China coming out of these lockdowns, we will see, in terms of the global macro picture, the recessionary pressures we've. Seen today are partially a result of the supply change chain shortages that are. Visible around the world because China has remained in lockdown when everyone else basically hasn't. Right? So when we start to have that revival in China, I think, we'll, it will ease up things all over the place, all over the world. We can stop having such high interest rate bumps, and then we'll just see demand actually coming back in other regions as well. So I think it's looking to be a very. Tight picture for next year?

Richard Sverrisson, Editor-in-Chief, Montel: 21:01

For next year. Is this, do you share that view? Eleni, is the race for LNG and LNG cargoes is that gonna hot up in, in 2023 maybe? As early as the second quarter or the first quarter even?

Eleni Papadopoulou, Lead Gas LNG Insights Research, Kepler: 21:12

You did mention it. Everything will boil down to what happens this winter for storage and whether we'll determine that as well. All parties in a way will have to observe in terms of anything that might actually impact any part of supply and demand in multiple places as we head into colder weather seasonally colder weather and gas for heating demand actually is more sought after. It'll be very interesting to be doing the research and analysis on this. Yeah.

Richard Sverrisson, Editor-in-Chief, Montel: 21:50

Absolutely. I think it's gonna be a, as Nadia also mentioned, it's gonna be a very interesting year 20, 23 and probably quite a bit of a rollercoaster ride.

Eleni Papadopoulou, Lead Gas LNG Insights Research, Kepler: 21:59

Yeah. And in terms of China. Watch out for in terms of gas, in terms of any developments there. I touched briefly upon demand side. There are lots of things domestically as well in terms of other fuels and in terms of even upstream. So there might be additional pipeline deliveries from Russia to China next year with commissioning of new gas wells. And then you feel there. So there are multiple factors we need to look into and it makes it a bit more complicated to get a bigger wider picture in terms of uncertainties and try to weather that out further out. And it also very much depends on policy driven, what actions are gonna be taken from regulatory point of view, because there are some expectations. For some further actions and we need to see how that plays out as well. And one example would be some infrastructure developments like new LNG terminals coming up in Germany, whether they're going ahead on time or being delayed. What happens on the power side across the board? So for example, we've seen the impact in France with the nuclear situation lately. We need to see what happens in terms of price caps. The European Commission recently proposed the idea of gas price cap in order to limit excessive gas price spikes. And the proposal consists of safety price ceiling of 275 euro per megawatt hour on the month head ttf. But there are two main conditions for that. That the price has to exceed the 275 euro per megawatt hour level for two consecutive weeks, and that they're higher by 58 euros per megawatt hour than the LNG reference price for 10 consecutive trading days within those two weeks. So we've seen quite a few. Different feedback, let's say from different countries for this idea or this proposal not being as effective enough in terms of like it's 11 duration and scope. And I would say like we are expecting to see the outcome of the other meeting in mid-December between EU members to finalize a decision.

Richard Sverrisson, Editor-in-Chief, Montel: 24:35

Exactly. Last week's pods dealt quite quite in quite depth about the price cap issue with some countries having labeled it a joke. I dunno what your view is, Nadia, but I think a final question really as unfortunately we're running out of time, but, one of the core tenets of the European policy is that companies and countries even stand together and purchase gas together, or certainly cooperate. Is that realistic?

Nadia Martin Wiggen, Energy Analyst, Pareto: 24:58

I it is an idea, but it's, are they going to do it in the short term or the long term? The main thing, just to also mention on the gas price thing, I. One of the believers that it doesn't really do anything because it's at a much higher level than what we've seen, and it does nothing to alleviate the problem of supply. It suggests a little bit of this tricky point of moral hazard for producers, and that's why I think they had to set it so high. To show that this can only be used in absolute extreme situations. We're not going to start overriding market relationships. And that is something that I think is extremely important in Europe and why we have done so well. Flourishing on so many front. We are a good regulatory, stable system historically. That's why renewables can come in. All of these sorts of things. This crisis has started to show change and when these sorts of things. A small change for a government is actually a very big change to the market, both to producers and to investors, and I think we're in a very dangerous situation introducing measures like this. And so if the European Union as a whole wants to do something, my advice is we need to side long-term contracts with multiple providers, including Ecuador, including the United States. Not only rely on the Middle East, we have to diversify on that side and other places, and then we'll be in a better situation and then we can do it as a body altogether to ensure that backup supply

Richard Sverrisson, Editor-in-Chief, Montel: 26:38

sounds. Sounds fair enough, Nadia? Absolutely. So I think we'll end on a slight warning, but also on a bright side a call for diversification o of supply. Eleni and Nadia, thank you very much for being guests on the Montel Weekly podcast. So listeners, you can now follow the podcast on our own Twitter account, aply named the Monte Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.